The Reserve Bank of India (RBI) has revised up its ways and means advances (WMA) limit for the government, this time to Rs 2 trillion, from Rs 1.2 trillion announced on March 31, to give some temporary ammunition to the government to fight COVID-19 related dislocations.
WMAs are temporary liquidity line given by the central bank to the government to meet short-term expenditure needs of the government. Typically, the normal WMAs are valid for 10 working days for the centre and 14 working days for the states. But there could be WMAs for 90 days also, with an overdraft facility for 10 days. The rate of interest for WMA is the bank rate, which is currently at 4.65 per cent. For the overdraft facility, government will have to pay 2 percentage points extra to the RBI.
However, if 75 per cent of the WMA is used, the RBI can come with marketable securities of various tenors. It can be placed with the RBI, or sold in the market if the market conditions remain conducive.
The two-step increases in WMA limits may indicate that the government doesn’t want to disturb the market, but will have to if there is no other way.
The latest limit is a huge increase from the first half of last year’s Rs 75,000 crore. For the second half, the WMA for centre was fixed at Rs 35,000 crore for fiscal 2019-20. The RBI last Friday also increased the WMA limit of states by 60 per cent.
The revision in WMA limit gives the government ready money to fight Covid-19, and also gives the option to borrow from the market once 75 per cent of the ceiling is reached.
The increase in WMA comes at a time when the government is expected to come up with its economic packages to fight a COVID-19 related health and economic emergency. However, it is only a short term arrangement, which would also mean that the centre will have to come up with extra borrowing at some point. Even the International Monetary Fund has suggested the government to relax its fiscal stance even as the country may not have adequate space for a fiscal package.
The government plans to borrow Rs 4.88 trillion, or 63 per cent of its total borrowing, from the market in the first half. Bond dealers expect the government to place any extra borrowing in the first half privately with the central bank, without disturbing the market.